Bank consolidation has worrisome implications for moral hazard, as long as there continues to be a perception in the market of an implicit guarantee. As a small number of banks acquire a larger share of the market and competition decreases, the systemic risk they pose rises.

There will be more bank failures, and many of them will end up with the failed bank getting taken over by one of the big four. Treasury has as far as I can tell no plan at all for reversing the trend in this graph, even though a good 35% of the US banking system is now undeniably too big to fail and drenched in moral hazard.

Remember too that most of the deposits in this graph don’t only have an implicit guarantee from the federal government, they also have an explicit guarantee from the FDIC, which simply doesn’t have the ability to insure sums of this magnitude. But with too-big-to-fail banks valuing that status as being worth billions of dollars, you can be sure that they’ll fight hard to prevent any attempt to shrink them. Chances are, they’ll succeed. These banks will continue to be far too big for the foreseeable future.